Last year we published this blog, Fraud Deterrence for Small and Medium Enterprises (SMEs), tohighlight the common organizational fraud that SMEs experience. Billing schemes are one such type of fraud.
What is a Billing Scheme?
A billing scheme fraud occurs when by deception the organization makes a payment to an employee and record it as a legitimate business expense. The expense is not a legitimate business expense, and the victim organization derives no benefit from the payment.
How it is executed
There are 3 parts to a billing scheme. These are:
- Create a false entity.
An employee either creates a dummy company or bank account, or a fake entity to serve as a front for one or more companies. Ultimately, the dummy company presents invoices for non-existent goods or service.
- Create of a fake invoice.
There are different ways to do this, some of which are a) presenting invoices from dummy companies and directing payment to them; b) falsifying invoices from regular supplier and redirecting payment to different addresses; c) presenting invoices from accomplices who get the payment and split it with the employee.
- Manipulate payments.
The employee must be able to manipulate payment processing. There are different ways to do this; he can approve the payments, or he has influence over the systems, or exploits a weakness such as approvers lack of attention to details.
Billing Fraud Indicators
Is a billing scheme fraud occurring in your business? Here are some indicators of a billing scheme fraud.
- Invoices are not traceable to shipments or goods received.
- The business makes multiple payments to a single vendor on the same date.
- There is a pattern of submitting invoice just below the threshold for review.
- Unexpected rise in purchase and expense trends.
- The business has decreasing profits.
In small businesses, the factors that enable such frauds are:
- Weak internal controls.
- Management overrides.
- Trusting an employee too much.
- Approver’s lack of attention to details.
Knowing your business is a key step in combating fraud. This will help you identify the risks to which you are vulnerable so you can put in measures to mitigate them.
Here are some measures to mitigate against billing scheme.
- Segregation of Duties–use a system of check and balances to ensure no one person has control over all parts of a financial transaction. An example, you don’t want the person receiving the goods being the one approving payment for the goods.
- Know Your Suppliers–maintaining a current list of approved vendors. This helps to determine if the payment is real. You would want to scrutinize payments to suppliers who are not on the list.
- Know Your Employees–hire people with an acute sense of integrity. Business owners and management must show and enforce a high ethical standard in their dealings.
- Review Your Expenses–you must review the trends in your expenses and investigate expenses that are out of line.
- Regular Reconciliations of Supplier Statements–for significant suppliers, periodic reconciliation of their statements can help uncover fraud.
- Seek Help from an Expert–if you are not sure what measure you can install, seek expert help.